2016 (12) TMI 1408 - HC - Income Tax

Court clarifies transfer pricing adjustments apply to associated enterprises only, not entity level. Consistent tax law application emphasized.

The Commissioner of Income Tax-1, Mumbai Versus ALSTOM Projects India Limited

The Court upheld that transfer pricing adjustments should only apply to transactions with Associated Enterprises, not at an entity level, emphasizing the ... Transfer pricing adjustment - Tribunal held that the TPO has applied the transfer pricing adjustment to all transactions, i.e. entity level - Held that:- We are in respectful agreement with the view of the Delhi High Court in Keihin Panalfa Ltd. (2016 (5) TMI 203 - DELHI HIGH COURT ). One must not loose sight of the fact that the transfer pricing adjustment is done under Chapter X of the Act. The mandate therein is only to redetermine the consideration received or given to arrive at income arising from for International Transactions with Associated Enterprises. This is particularly so as in respect of transaction with non Associated Enterprises, Chapter X of the Act is not triggered to make adjustment to considerations received or paid unless they are Specified Domestic Transactions. The transaction with non-Associated Enterprises are presumed to be at arms length as there is no relationship which is likely to influence the price. If the contention of the Revenue is accepted, it would lead to artificial increase in the profits of transactions entered into with non Associated Enterprises by applying the margin at entity level which is not the object of Chapter X of the Act. Absence of segmental accounting is not an insurmountable issue, as proportionate basis could be adopted as done by the Delhi High Court in Keihin Panalfa Ltd. (supra). Thus no substantial question of law arises. Issues:Transfer pricing adjustment - Entity level vs. Associated Enterprises transactionsMaintaining segmental accounts for transfer pricing adjustmentTransfer pricing adjustment - Entity level vs. Associated Enterprises transactions:The appeal under Section 260A of the Income Tax Act challenges the order passed by the Income Tax Appellate Tribunal related to Assessment Year 2006-07. The question raised is whether the Tribunal was justified in holding that the transfer pricing adjustment should only apply to transactions with Associated Enterprises, rather than at an entity level. The Revenue's grievance is that in the absence of segmental accounts, the adjustment should be done at an entity level. However, it is noted that the Revenue did not advance this submission before the Tribunal. The Court refers to previous cases where similar issues were raised, and it was upheld that transfer pricing adjustments should be made only in respect of transactions with Associated Enterprises and not at an entity level. The Revenue's inconsistency in taking different positions on the same issue is criticized, and the importance of a consistent application of tax laws is emphasized.Maintaining segmental accounts for transfer pricing adjustment:The Court addresses the issue of maintaining segmental accounts for transfer pricing adjustment. The Revenue argues that the absence of segmental accounts should warrant entity-wise adjustment. However, it is pointed out that in a previous case, the Revenue accepted that even in the absence of segmental accounts, adjustments should only be made in respect of international transactions with Associated Enterprises. The Court stresses the need for a consistent application of law by the Income Tax Department and refers to a Delhi High Court case where it was held that adjustments should be restricted to transactions with Associated Enterprises when separate accounts are not available. The Court agrees with the Delhi High Court's view and emphasizes that transfer pricing adjustments under Chapter X of the Act are meant to redetermine consideration for international transactions with Associated Enterprises, not for transactions with non-Associated Enterprises. The absence of segmental accounting should not artificially increase profits from transactions with non-Associated Enterprises, as the presumption is that such transactions are at arm's length. Therefore, the Court dismisses the appeal as no substantial question of law arises.